Fresenius Medical Care AG & Co. KGaA (FMS) Q1 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, the Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care earnings call for the first quarter results of 2014. [Operator Instructions] I would now like to turn the conference over to Oliver Maier, Head of Investor Relations. Please go ahead, sir.

Thank you very much, Patrick. We would like to welcome all of you to Fresenius Medical Care's earnings call for the first quarter of 2014. Also, a warm welcome to the ones joining us on the web today. We very much appreciate your interest. As always, I would like to start our call mentioning the cautionary language that is in our Safe Harbor statement of our presentation and the material we distributed today. For further details concerning risks and uncertainties, please refer also to our filings, including our SEC filings. With us today it's Rice Powell, our CEO and Chairman of the Management Board; and Mike Brosnan, our CFO. So that's it from my end, already. Rice, the floor is yours.

Thank you, Oliver. Good evening for those of you in Asia, good afternoon for those in Europe, and good morning for the folks that are in the United States. I think, my headline today is as follows: Slow start to this year, but in line with our full year guidance. As you recall, our February meeting, where Mike and I talked about guidance and how we saw this year developing, we have given you a sense that Q1 would be a difficult quarter for us. Rather than taking you through the figures and the blue shaded piece of this, you can see them I think, it's probably more appropriate if I just walk you through my commentary about the figures. In North America for the first quarter of this year, we had overall good top line growth. Obviously, we had earnings issues, earnings were impacted by the last quarter of sequestration. The rebasing impact has more than offset what the market basket update provided for us. In summary, we were not able to cover the cost of care, as we would have liked to. Quantification of this, Mike will walk you through in some of his slides in a few minutes. Our International growth was really impacted by 2 key things. As we highlighted for you back in February, we are undertaking a reorganization of our distributor network in China. We believe, it's prudent to get away from 1 or 2 large distributors and balance that among some medium-sized distributors to go along with these big guys. We don't want to be too concentrated in any particular area, and that obviously had an impact on the Products business in China. And then we saw significant delay in product sales coming off of our strong fourth quarter. I'll use the phrase that we went into this year with a hangover from the push that we had in fourth quarter and then a few slides from now, I'll give you some more detail and color on that, if I may. The last quote I would make on Slide 4, is that the company is on track to achieve its full year guidance and the cost saving target. And again, let me remind you that our GEP target for this year, was up to a pretax figure of $60 million, net of onetime costs, and Mike and I will be happy to answer your questions on that, as we work our way through into the Q&A. Looking at Slide #5, our revenue breakdown for the first quarter. You can see nice performance in North America with 4% organic growth and 5% revenue growth coming in at just shy of $2.4 billion. Looking on the International space, you can see we're at $1,161,000,000, 4% constant currency growth, with an organic growth of 3%. And then you see the various breakdowns among the pieces of the International business. And again, North America, at roughly 67% of the first quarter's revenue. Moving to Slide #6, and focusing on the revenue growth in dialysis services. Again, I will speak in this case to the blue shaded area. You can see us at just shy of $2.8 billion in the first quarter for total dialysis services revenue. In the constant currency view, you see that it's 5% growth on the total basis, very nice growth at 8% internationally in constant currency, and North America at a constant currency growth of 5% in the dialysis services business. And moving over to the last column, you see the same market growth at 4%. International at 4% and then in the North American market, we have it at 3%, I think, it was exactly about 3.3%. So I'll take that extra 0.3%, and give that to you as well, if I may. And I think that should suffice for that slide. Let's go to Slide 7. Looking at the products revenue external only. And again, looking at first quarter revenue of $782 million, you can see that constant currency growth for North America at 5%, very consistent performance with the fourth quarter. And then where we've had, I would say, surprising results is in the International side, where in constant currency growth we're down about 1% year-over-year. Let me try to give you some more detail and certainly will answer questions on this at a later time as well. The product growth in North America, just to give you a sense of some of this, the dialyzer business in North America is up 17%, 1 7, a large contributor to that is 685 single-use patients that came in the first quarter. As your remember from years past, we used to track, and we still do, the number of patients that we get coming off of reuse and coming on to single use, so we have 685 of those in the first quarter. We saw bloodline sales up 6%, [indiscernible] sales were up 12% in the quarter, and the machine business was down about 4% in the first quarter and some of that is fourth quarter hangover as well, I would say in North America. Now when we look at International products business, we've talked about the distribution network in China and delays. Let me give you a little more color on this. I'd say specifically, when you consider Asia Pacific and the rebalancing, if you will, or the reconfiguration of the distributor network, that was worth about $16 million in product sales for us to give you some sense of that. And we saw a little softness in Korea as well. Looking at EMEALA, as I said earlier, the preponderance of the end of the year push or the first quarter hangover, really comes from machines and somewhat from dialyzers, but the largest piece of this is machines. We've got tenders that as you know, we've begun to fulfill at the end of last year, as I've also told you many times before, we do not randomly [ph] fulfill tenders on a quarter-to-quarter basis. They do appear to be somewhat lumpy. We do ship one quarter, then we may skip a quarter and come back. We fulfill as requested by the tendering authority. And also in general, not huge markets for us, but we are seeing a fair amount of turbulence that affects our products business in the Ukraine, Libya and Egypt. Some of the places that we've got some unrest. It obviously does have some impact on the product business in those areas. Moving to Slide 8, looking at our global service's franchise. The key 3 figures that I will give you: 3% growth in our clinic base, 3,263 clinics as of the end of March of this year; 4% growth in treatments; and 3% growth in patients. So we are just shy as of the end of March of 271,000 patients globally, and we did 10 million treatments in the first quarter on a global basis. Looking at 20 de novos in the quarter, just to give you some sense of where that fits over relatively important periods of time. First quarter of last year, we had 15 de novos, and then coming out of fourth quarter, we hit 23. So 25th [ph] is kind of right in between where we've been, we're comfortable with that number and you see the relative contribution between North America and International. And as we have told you, when acquisition opportunities are there for clinics, we'll take them. We've been pretty clear that in North America, given all of the indecision that was there, over the back half of last year, we were very cautious about what we would look to acquire. I think, Q1 bears that out, with the fact that we made no acquisition clinic -- or no clinic acquisitions in the first quarter, and a modest number in International. You should not assume it would continue to stay that way in both regions. But again, I wanted to just give you little bit of color on that. And then looking at our quality outcomes on Slide 9. I will summarize by simply saying, we see good consistent performance; we see a little movement up or down, depending on the parameter that we're measuring; but by and large, I would say, we are consistent performance here with our hemoglobins, our hospitalization days, albumins, et cetera. So I think, we continue to perform at a very stable and high level on our clinical outcomes in our Care business. Slide 10, in my summary slide, I would like to just simply reiterate first quarter, as a reflection of what the full year guidance was communicated to you back in February. Many of you were with us in April, in New York City. I think, we gave you as clear a strategy for future growth, as we can. We outlined the components and the path for how we would potentially get to, what I believe, is an aggressive, but exciting number of $28 billion by 2020. And lastly, our global efficiency program, as we've told you, is going to enhance our performance over time. Not a huge contributor this year, but expecting a lot of good work and results, as we go out into the future. And with that, I think, I will pause and turn it over to Mike.

Great. Thanks, Rice. Again, hello, everyone. I'll continue on Chart 12 of the prepared materials. Rice has talked in terms of revenues for the quarters, so I'll move to the operating margins. Our operating earnings were down 10% or $48 million from $493 million to $445 million. This represents decline in margins, as you can see of about 170 basis points from 14.2% to 12.5%. North America, the impact from North America was about 130 basis points, International was about 30 basis point and corporate costs was about 10 basis points. So first in North America, operating income is decreased about $30 million, with the margin effect of about 200 basis points. We did have the carryover effect of sequestration for $18 million. In addition, we had a reduction in the reimbursement due to the rebase of $32 million. And as Rice indicated, this was partly offset by the Medicare market basket increase, which had a value of $27 million. I'll just reiterate, although, the rebase net of the market basket increase is a modest reduction in reimbursement rates, it does not allow for the recovery of the usual cost increases we face in order to provide care in the U.S., and these are primarily related to personnel expenses. Moving on for the quarter in North America. We did see an increase in our production cost and our distribution expenses that were slightly higher, and this was partly offset by income from our equity invested investees [ph] and also lower legal costs in the first quarter of 2014. In International, operating income decreased about $12 million, with a margin effect of about 90 basis points. The increase was mainly due to unfavorable foreign exchange, net of the impact of the 2013 devaluation of the Venezuelan Bolivar. We also saw a margin effect related to the lower product sales, that Rice referred to, and we accrued for a small loss related to our internal compliance review in the quarter. Corporate spending was up about $6 million and this related to some of the changes we recently announced in the management board. Moving to interest and taxes. Earnings did benefit from lower net interest costs, largely due to increased interest income related to loans we've made to businesses in the United States. And lower borrowing rates, which were partly offset by an increase in debt in the first quarter. Earnings also benefited from a reduced tax rate, 29.1% versus 33.2% in the prior year. This is due to our internal financing benefits, higher joint venture earnings in North America and a positive effect related to ongoing tax audits, that we took in the quarter. Reported earnings as a consequence were down 9% or roughly $20 million. The after tax effect of sequestration, the small accrual related to the compliance program and the benefit in tax expense associated with the tax audits, partially offset each other in terms of their impact on net earnings for the quarter. Earnings per share decreased 7% to $0.68, reflecting the benefit of the share repurchase program that we completed last summer, net of stock option exercises since that date. Turning to Chart 13. Regarding our DSOs, you don't see a big change, we went from 73 days at the end of 2013 to 74 days at the end of the quarter. It's a mixture of good and bad news. The good news is, we continue to see very good performance in the International side of the business, improving 3 days from year end to 107, as of the end of the quarter. Spain was a big help with special collections of $30 million in the quarter, and we appreciate that lots of hard work goes into this metric on a worldwide basis. We appreciate folks around the world staying on top of collections in the business. In North America, this -- DSO increase of 3 days from 53 days to 56 days, is driven both by the U.S. and Mexico. In Mexico, we're seeing some payment delays, which is not unusual. It added about 1 day to the DSO for the region, and we would expect the payments to catch-up in due course. In the U.S., we had a number of changes driven by filing requirements with Medicare with regards to some of our joint venture operations. These do take time for the government to process. The effect on the quarter was 2 days of DSO, and we expect this will right itself in the second and third quarter. None of these matters changes our expectation for the year on cash flows, or the quality of the underlying receivables. Turning to Chart 14, and now looking at cash flows year-over-year. The year-over-year effect will -- with regard to changes in accounts receivable, obviously, is 1 day, that's a relatively modest effect on the overall position in receivables. We did finally make the payment associated with the Grace bankruptcy, which resulted in a payment of $115 million. This payment was agreed due contractually in 2003 and required the final approval by the courts of Grace's bankruptcy plan before of the amounts could be settled, so that's now behind us. In addition, we built inventories in the first quarter, with a cash flow effect of approximately $110 million. This was planned as part of various capacity expansions we have in several locations around the world. If you were to look at our reported cash flow of $112 million, then you would simply add back the Grace payment and the relatively high changing inventories we had in the quarter of $110 million. You'd get to approximately 10% of revenues from some operating cash flows, which is somewhat normalized view of our operations. Our capital expenditures as a percent of revenue was up year-over-year, but it is in line with our guidance for 2014. In addition, we spent $137 million on a gross basis on acquisition and investments. For this particular quarter, most of that $137 million was related to statutory investments required in our captive insurance company, so it's simply a movement from cash to short-term investments. Remaining amounts were invested in small acquisitions in all regions around the world. Turning to Chart 15, there's nothing new on this front. Our leverage ratio was 2.9x EBITDA, still below the guided figure of less than 3x. Overall, we had stability with regard to the ratings from our agencies and our overall debt at the end of the quarter was $8.6 billion, up a little bit from year end. Turning to Chart 16. We are confirming our guidance for the year. We believe that our Q1 performance is in line with the guidance that we have provided. We do expect modest improvement in operating performance as the year progresses and you can see that clearly the overall numbers that we've indicated at year end as well. And with that, I think, I'll close my prepared remarks, and hand the call back to Oliver.

Great. Thanks, Patrick, I think, we're now ready to start the Q&A session, Patrick.

[Operator Instructions] And our first question for today comes from the line of Michael Jungling of Morgan Stanley.

I have 3 please. Firstly, can you comment on U.S. drug inflation costs for the first quarter? Secondly, can you comment on labor inflation increases in Q1? And the last question is, if I look at U.S. dialysis services, when do we expect, or when would you expect to a change in revenue growth, referred to as revenue per treatment, to be more in line with cost per treatment? Would it be the third quarter or the fourth quarter? Some sort of guidance, I think, would be very helpful.

Okay. Michael, it's Mike Brosnan. With regard to U.S. drug inflation, we had indicated last year, when MGEN [ph] increased price, as is typical in our business, we look at managing the pharmaceuticals, both in terms of utilization and also just in terms of our overall sourcing of all pharmaceuticals in the services business. So the impact in the quarter was a modest-to-positive in terms of Q1. Labor inflation, I think, over the years, we've done an excellent job managing the overall cost of labor, getting efficiencies, where appropriate, that do not decrement the quality of care that we provide to patients. I think, as Rice indicated earlier and I did as well, with the adjustments that we're seeing on the rebase, it's very difficult to mitigate all of their labor cost simply through efficiencies. You do need to recognize the overall effect of inflation on the ability to perform services. So that's, at least in part, the effect you're seeing in terms of the cost per treatment increases versus the revenue per treatment increase. With regard to the underlying rate, I think, it's a fairly modest rate of inflation in labor year-over-year. Third question, in terms of U.S. services and revenue growth. What I would say in terms of revenue per treatment and cost per treatment, because we haven't guided on this for a number of years, but as we get into the year and we see how the year is developing, I do, from time to time, make some comments. So I would say with regard to revenue per treatment, you do see 2 effects: you see the overall effect of the growth of our Care Coordination business, which we now disclose separately in our filings; and you see the underlying pressure on the Services business due to sequestration, due to the rebase and the fact that the rebase is essentially taken away the benefits associated with the market basket increase. I would expect that the overall revenue per treatment will improve slightly in the back half of the year, but I think, this improvement will be really related to the Care Coordination business as opposed to the underlying dialysis Services business. And on the cost side, I think, you'll see over the balance of the year, some mitigation -- some reduction in the cost per treatment from what you're seeing in the first quarter. But in large measure, this is due to the fact that the first quarter, relative to the rest of the year, has fewer dialysis days. So 76 days in Q1 and then it grows to 78 and 79 days over the course of the year. So, I think on the cost side, you'll see the total cost per treatment relatively stable after considering those days. And then, when you look at that, at Care Coordination versus the underlying dialysis Services business, I think, you'll see us continue to invest in Care Coordination. And I think, you'll see a modest positive effect in the back half of the year related to Services.

Great, great, very helpful. And then my final question is on cost savings in the first quarter gross. Can you highlight what the savings were and also what they were net? Meaning the implementation of the cost savings program. That's all.

Yes. I think that relative to the cost savings program we had indicated in guidance for 2014 that we expected to see up to $60 million this fiscal year and that number is on a net basis, that's after considering costs associated with implementation. I think, in the first quarter, I'm happy to report that we did see a small modest positive low single digits in Q1, related to the GEP program on a net basis.

Our next question comes from the line of Lisa Clive of Sanford Bernstein. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: I just have a few questions on Care Coordination. At the Capital Markets Day, you indicated that the Care Coordination business is $500 million in 2013. Just to confirm, this is FMR-Rx, Spectra Labs, and Vascular Access? And within Spectra, this does include the Shiel acquisition? And then second, could you just give us some indication of what Care Coordination did in Q1? Apologies, if I missed that, I'm just trying to get an idea of the year-over-year growth for the quarter, both including and excluding Shiel. And that's all the thoughts on that at the moment.

Lisa, it's Rice. We're going have to do a little work on Q1 for Care Coordination, or I may give it give you more in an annual number. But let me just get back to your first question. Yes, so we said Care Coordination last year was about $500 million and the components of that are FMC-Rx, Vascular Care and the Spectra book of business, including Shiel as well, so you got that right. On Care Coordination or what it did within the quarter, we don't really have it broken down that way, but let me give you a couple of things, that I think will probably be helpful to you. When you look at FMC-Rx, kind of a full year basis, if you remember in February, I said to you, that there were going to be shy of $300 million in revenue, think about $275 million in that range, $280 million. We're looking at what I would say, high-teens growth for the full year this year, okay? So there's a pretty good pop that's coming from that business. When you look at the vascular access business, we had told you in the full year wrap up, that they were shy of about $200 million, they were in the $190 million range. And we're seeing right now, based on the way we look at it, about 5% to 6% growth there. Keeping in mind that one of the things that hurt us with Vascular Care was there was a 10% cut on reimbursement. Now the 10% didn't hold. It ended up, I think, might be in somewhere in the 5% or 6% range. I believe, but that's just trying to give you directionally some sense of what's going on right there. And I don't have numbers I can give you on Shiel at the moment, but let me say a couple of things about Shiel. At this point in the integration, all the employees are migrated into our system, our payroll, all of that. Very importantly, the assignment of all Shiel's commercial third party payer contracts have been moved into our book of business at this point and all of the licenses that we need to operate the laboratory have been reassigned to us. We had a slow start in January and February with Shiel, mainly because it was such a terrible winter and there were a lot of issues in just being able to manage. I think, it was something like 49 snow days up and down that New Jersey belt. The good news is when I look at requisition volume in March, we're up about 10%, so we're seeing a nice pop in the number of requisitions in March. What we saw in January and February was kind of flat to a little down, and I think a lot of that really was just generated from trying to get through the winter and some of the integration activity that we needed to have go on. Let me stop there and see if we know any more on the quarterly side.

Let me just comment because we do now disclose Care Coordination, it's in the 6-K for the first time, that you'll see after the call, Lisa. We're disclosing revenues of $161 million, up from $110 million [ph] of Q1 of 2013, so that's about a 27% growth -- excuse me, that's about -- sorry, I was going to say that Shiel is worth about $27 million of the $161 million, so 6% growth with Shiel about -- just over 20% growth of that. Lisa Bedell Clive - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then just one last question. When do you expect to start building out your Care Coordination business outside the U.S.? Is it fair to assume that the ramp up of that really is a bit further out perhaps 2 or 3 years from now?

Lisa, it's a great question. I would say it this way, we are actively looking at the path that we're going to take in all the regions. Certainly, when you look internationally, it make take a little longer in some places, as we look to how that's going to manifest itself. But know they were active globally on it, and it may well be that some things happen sooner in the U.S. or Europe and Asia, but we're moving on all those fronts, and I don't really think I can predict to you, who's going to pop first. I think, it's more logical that we may see that in North America sooner than perhaps internationally. But we're doing this all in parallel, we're not doing it serially, so we're looking at all the opportunities.

And our next question comes from the line of Veronika Dubajova of Goldman Sachs.

I have 3, 2 of which are pretty sort of financial, so Mike for you. The first one, could you give us a sense for what revenue per treatment and cost per treatment would have done, excluding the Care Coordination expansion in services that you saw in the quarter? That would be really helpful. The second one is just if you have any guidance in the tax rate for the full year, given the improvement in Q1? And my third question is for Rice. Rice, given some of the movement that we've seen on the ESCO front from CMS, I'm just wondering if you have any thoughts on how the pilot is progressing there, and kind of what kind of contribution we might be expecting from Care Coordination on the Medicare side, let's say, in '15 or '16?

Yes. So let me do it in reverse order, Veronika. So when we look at where we are at with ESCO, I can't tell you that my socks are rolling up and down at this point. We think it is a good thing that they took the rebase out after the third year, we think that's important, that they're not going to pull back whatever savings we could generate. But unfortunately, the rest of the architecture of the ESCO, as it sits today, is really putting a huge burden on positions to get in to the program. And obviously, we can't do this without our docs. And so I think from our standpoint as an industry, and in FMC specifically, we're still telling the CMS that this thing is just -- isn't likely to take off and have a lot of performance, if you will, or activity around the U.S. because docs are going to be very nervous about the way it continues to be structured. So I'm going to say to you that, that whole concept to ESCO, we're going to have a little more wait-and-see attitude. I think there are some meetings that are scheduled off and on through the next quarter, but our gut reaction to this is just that we appreciate that they took the rebase out, but we still think it's way too much of a burden on the individual docs, and I'm not sure how many are going to gravitate to wanting to get in to the ESCO. And obviously, as you think about this and we've said this before, this may be something that we end up pursuing in sort of a different look but yet, Care Coordination and the private side of the business, if you will, versus continuing to wait on the government. I mean, we'll continue to work with them, but it's just not happening fast enough for us with the right construct. Mike?

Yes. Thanks, Rice. Since we're going in reverse, the answer to your second question, I don't see Q1 having a big effect on the overall guidance I gave on tax year, I think I indicated in February, 33%, 34%, so we see that roughly within that range. Last question, I think for the most part, having now moved disclosure of the revenue with Care Coordination, we've always provided a lot of detail on revenue and cost per treatment in the U.S., we reported -- I'm not sure if I'm ready to take the next step and provide even more granularity on that, other than the qualitative comments I made to Michael's question. I think, as we've said in the past, I think for the last couple of years, most of the revenue rate increases and most of the increase in hospital treatment is related to the Care Coordination business. We see that with the underlying growth rates that we just talked a few minutes ago, and then qualitatively, as we commented on costs in the U.S., we indicated that the personal cost were not meaningful and the pharmacy costs are up a very modest positive in the quarter, so I think that gives you a pretty good sense with regard on net profits.

Our next question comes from the line of Chris Gretler with Crédit Suisse. Christoph Gretler - Crédit Suisse AG, Research Division: I have actually 2 set of question. And on the first relates to your same-store growth. I noticed, internationally, now that I'm spinning already a strong print [ph], no? Could you elaborate on a country level and where you have seen, particularly, good growth? And then the second part of this question relates to the U.S., where I noticed that you're continuing to under grow your competition. So I was wondering, do you think you are aware of the market are -- is and your competition is now ahead? Or basically do you have any sense about the market rate and the reason why you basically know -- see no lower growth? That will be interesting. And then the second question is just on the Care Coordination. Conceptually, this is actually the right way to think us of as a per treatment -- on a per treatment base? Because, I guess, some of these businesses, I guess, know the driver of it is now less treatment, so that's why I'm not sure whether that's the right driver for these type of businesses. I was just wondering your thoughts on that.

Chris, it's Rice. Let me see if I can give you some color on 1 and 2. Yes, on the same-store treatment growth, rather than kind of drag you to country to country, what I would say is we're seeing nice contributions from our de novo program and having that work for us. As you recall probably early last year, we were somewhat behind, not comfortable with where we were going on the pace of things, that's picked up. We've seen nice growth there and so we're happy with that, particularly in Eastern Europe and we are continuing to see growth in Asia as well. So I would say, it's not anything outside the norm of where you know the hotspots are, in general, in the International markets. Great question on DaVita and what are the differences. Two things, I would say. I believe we are at market growth, I think somewhere around 3% to 3.5%, 4% makes sense. Certainly, my hats off to DaVita with their growth rate. The other thing I do have to just make sure, and I can't give you a detailed answer, we don't necessarily calculate these things the same way. If you go and take our clinical indicators side-by-side, you look at mortality rates, you look at the number of things, we calculate them differently. We agree that we do it differently, no big deal, it's just not the same. I suspect that's some of the case here in the market growth as well, but probably I'll leave it at that, I think that's probably as good as I can give you at this point. And Mike, you want to pick up the third point?

Yes. On Care Coordination and the metrics, I think, for the moment coming out of what we've done, historically, we'll probably continue to report our revenue and cost per treatment inclusive in the U.S. I think we now supplement that with the additional disclosure of the separate revenue figures for Care Coordination, which gives, I think, the investment community some additional flexibility in terms of how they might want to look at that business and the ability to parse -- take that out of the equation, if you will. As we've develop these businesses, and as they become a much bigger part of our overall business in our planning period, we will undoubtedly come forward with some additional metrics, additional ways of looking at that business. So I see that as something we'll develop over time.

Our next question comes from the line of Ed Ridley-Day of Bank of America Merrill Lynch.

A couple of follow-up questions, please? First of all, your product revenue growth and the Chinese impact. Could you give us some color on the visibility that you have, that is a delayed order or canceled order and the phasing of both the Chinese business and, indeed, the International products business through the rest of the year? Given the lumpiness that you've highlighted and the number of uncertainties, where should we be looking really for the full year for International products? That will be my first question.

Ed, it's Rice. So a couple of points I would make. In the case of China specifically, yes, we have pretty good visibility as to what's going on there. And what I would say to you by the reconfiguration of the distributors, it's not that we're seeing canceled orders, I would think of it more in the way that we're seeing inventory pushed out through the system being consumed and it is not a loss of business as much as I would say probably a delay, if you will, of business. Now that should begin to turn the corner and come around in the back half of the year. I think, we'll see some improvement there. But I wouldn't lump all of International in there, so when I think about EMEALA [ph], Europe, Middle East, Africa and Latin America, I certainly want to see the hangover get cured and start to see some progress in the second quarter, if you will, and I believe that we will. And remember we were at such a hot rate in fourth quarter, I think we were around 7% or 8% growth internationally, and we talked about it than to say 4%, 5% is probably more rational. So clearly, it's down, but I don't think it's so lumpy that you're going to go from a negative 1% to 8%, back and forth and get whipsawed. And I would like to see us back into that 4% to 5%, I mean, I'll take 8%, if it's there, but I don't think I would predict that. But kind of separating China, on the one hand because we got control more over that, versus just a general opportunity when I look at across the EMEALA franchise.

That's very helpful. And just a couple of follow-up questions onto the other questions that have been asked. On Care Coordination, so on Shiel, I mean, clearly, there was a first year benefit from the integration of Shiel given the timing of the acquisition last year. I thank you for the color on the growth there, but you previously guided this year, revenue for around $100 million. If we take 1/4 of that, I mean $20 million, $25 million, are we in the ballpark for the first quarter?

I gave you the number, Ed. I told you it was $27 million.

Yes, we were at $27 million, Ed. Maybe you didn't hear Mike.

No, I didn't...

[indiscernible] perfectly aligned.

And just in terms of a follow-up on the tax rate as well, so we should expect a -- effectively, a reasonably material high tax rate through the rest of the year? It does seem that your tax guidance to the previous question is a little conservative.

Yes, I think I'll stick with the 33% to 34% for the year and we'll see what develops as the year progresses, yes.

Our next question comes from the line of Tom Jones of Berenberg.

I was wondering if you could just circle back to the products business for the first question. You gave us a very helpful breakdown of the mini split between growth rates in machines, consumables, fertilizers and dialyzers, et cetera in the U.S. I wonder if you can make some similar comments in the International business. And perhaps also make some comment, qualitative if not quantitative about volume and price trends in the International business, really I'm just looking for a bit more comfort that what we're seeing in Q1 is just a temporary blip and that we should be back on trend for Q2 and beyond. The second question was just on international pricing. You had a pretty strong quarter on the back of what was also a pretty strong quarter in Q1, 2013. Just some thoughts about how you're thinking about the international pricing landscape for this year? And then the final question, I'm just curious as to what prompted the investment in your captive insurance business at this juncture? It was a fairly significant amount of money. I just wondered if there's anything operational you can see on the horizon that's prompted you to make that investment at this point, rather than any point in the past.

Tom, it's Rice, and I'm going to let Mike certainly handle #3, but let me try to give you a little more detail on the products when you look at the split. What I would say is, internationally, where we saw the most pressure, if you will, or performance disappointment was in the area of machines, #1. And I would tell you that second to that is dialyzers, but there was the most pain around the machine business. Think of it in terms of -- I was disappointed somewhere in the 2% to 2.5% range. Dialyzers were less than that, but obviously those are 2 great product lines for us. And so when they don't come through, they create some pain for sure. From a volume and price trend, what I would say is the volumes are still there. As Mike mentioned, we made a conscious decision, summer time last year, to begin to build inventory because we've got some expansions that we're putting through, which means brick-and-mortar and some of the large factories, and we always try to build inventory just because we can't always bring the construction project in right on time. From a price standpoint, we do continue to see pressure. I think we talked a little bit about that in the full year that we're feeling pressure from some of the Japanese companies as they particularly try to get stronger positions in China for one, Korea, other places like that, so I think that pressure is there. I know you'll ask me, so I'll go ahead and say we're not seeing or feeling pressure in the U.S. yet from Gambro Baxter, but it will come, it's a little early at this point, but we're not seeing too much there. And then as we look at reimbursement rates, particularly in the International markets, we commented on that a little bit. We do see a little pickup in certain places and it goes away someplace else, so I would say we are continuing to feel that there's pressure there, no huge wax like we've been saying in the U.S. and all the consternation that caused, but we do see the give and take, and I don't think that's enough for us to fundamentally, Mike, believe we can tell you it's all going to come down or it's all going to go up. We just sort of see the puts and takes as they come, so I think it's a little bit steady as she goes on reimbursement. And then on the captain [ph] insurance?

Yes, Tom. I wouldn't read anything in particular into the investment. Essentially, it's based off the annual audits that are required, and you have to meet a certain amount of statutory capital in short-term low-risk deposits to support the business. One of the reasons you see the number go up, and we've done this each year for a number of years, but one of the reasons you see the number go up is because as each year progresses, we have an additional year of help [ph] in the captive insurance company. So you're covering a higher quantum of risk because you've got additional years captured in the captive. We also have an option as to what we put in the captive and we've had very good experience, historically, so we tend to put more risk through the captive as the years have gone by. This has been in place for over a decade.

Okay, so nothing operational to worry about?

Correct.

Okay. If I can just circle back on the Products business and Pricing in that area. I mean, it seems to me that the pricing has never been great in the Products business, but the pressure seems to be ratcheting up notch by notch over the last couple of years, and as the big incumbent in the hemodialysis space, you're probably the one with the most to lose. I mean, what steps are you taking to try and defend price, maintain share in that space? Are you doing anything different with your businesses, or just kind of good products, good prices wins the day?

I would say a couple of things, Tom. And we believe that high quality at a fair price does win the day, but the pressure is there. And so where we've got to go and we're down that path and it's working in certain markets is, we've got to deliver more predictable outcome from our products being used in the therapy, and being able to get payers to realize that we're going to put you in the best position to reduce hospital days, better outcomes for patients, et cetera. And we really do believe in that, so let me give you some examples. We do draw our premium reimbursement in select European countries for our hemodiafiltration, and we continue to push that there, being try to educate as many payers as we can around Europe and Asia that this is an opportunity and you need to seize on it. And obviously, in the U.S., where there's a much smaller available market, because we've got such big shares, we've always been about trying to go in and show people how to use our product to get the best outcome. I'm actually one of the guys that believes that government's QIP program, where they whack providers if they don't get certain quality levels, plays to our product vertical integration position because we can go in and try to directly link that for people to get them to understand that they're buying value. There's always going to be the price argument, you know that, but I think that's how we believe we have the better ability to maintain share and not just completely maintain it because we're dropping price.

Our next question comes from the line of Holger Blum of Deutsche Bank.

Holger Blum, Deutsche Bank. Just 2 questions from my side. Firstly, of a more technical nature from your Capital Markets Day, you had the impression that the minority should be developed [ph] further in line with the earnings momentum now. We have a very big gap in Q1 and in many one-off, or is Q1 with AM [ph] rates to extrapolate going forward, or will that portion of minority further increase going forward? Second question related to Wells Fargo, maybe you can share your impression since the launch and maybe say to what extent do you manage to get onto Tier 1 co-pays for -- on the reimbursement listed insurance funds?

Holger, it's Mike. I'll take the first one. No surprise to you I'm sure. To be honest, I'm trying to think back to our Capital Markets Day, and I just didn't have a chance to look at the transcript for the call today. But I did go back and look at developments towards the back half of last year. There was a question in Q3 about expectations and I had indicated that with some of the changes we have in our underlying [indiscernible] because we continue to adjust the franchise [indiscernible] ownership positions with [indiscernible] in terms of buying and selling. That coming into Q4 we were looking at something on the order of about 9% of operating earnings, and that was up over the course of '13, full year '13, we're at about 6.5%. So when I look at this year, I would say, just to give you some additional insight, I'd say probably in the range plus/minus 8.5% of operating earnings is where I'd expect the minorities to be in 2014.

On Delforo [ph], obviously as you know, it was toward the end of the month of March when we launched it, so there's not much to report their from a revenue or a profit standpoint. But you're asking about the impression is great because that's the way to consider it. What I would say is, we are getting a lot of interest from the physician community. That has gone very well, we've been very active seeing physicians and talking to them about the product and the benefits, so that's gone well. We have gotten ourselves secured contracts in the managed care market in a couple of places, I can't tell you exactly who I just -- don't say that close to the detail. I would say we've got a number of folks that we've made presentations to and we're waiting to hear back from them. So I would say we are progressing, we're getting some places that we want to be in, but we're not done yet. I think, we're going to probably work all the way out through the summer into early fall before everybody we've got in front of us is going to come back and give us a decision. So it's a little early, but first impressions, I'm pleasantly surprised and we just got to keep doing our job in selling and calling on docs and working with the managed care folks.

Our next question comes from the line of Konrad Lieder of equinet bank.

I've got a question pretty clear on onetime cost, which may be included in the Q1 results, particularly on the global efficiency program. You had mentioned that you have $100 million in implementation cost. How much of this have been already incurred in Q1? My estimate of $20 million would be too high? And furthermore, you spoke of higher quality and compliance costs, which should be to large parts of a onetime nature of $30 million to $60 million in 2014. How much of this has been incurred in Q1? And I've got one question on the headcount development. Your headcount is up 5.4%, sales force [ph] only up 3%. I do not fully understand what you're building up the headcount for, and when this headcount will translate into higher revenue growth? Because as I also see, cost for treatment is up, the further cost issue, which you currently have on your margin side and less on the revenue per treatment side, in my opinion. So maybe you can elaborate of any higher cost or investment into headcount translate into growth?

Konrad, Mike Brosnan. I'll take the first 2. In terms of onetime cost per GDP, I think we guided on a net basis, so I'll probably continue to do that in terms of my commentary during the year. And as I mentioned before on a net basis in Q1, we did see a small single-digit millions net benefit. You're absolutely correct over the entire period, we anticipate to get the net of $300 million of sustained savings that we would invest about $100 million over the entire period, so the number is correct. But I think the good news for Q1 is on a net basis, we had a positive, not a negative, as I had indicated. In terms of higher compliance and quality costs, you're absolutely correct. I guided that we'd have an incremental spend of $30 million -- up to $60 million and that I had included $30 million in the guidance for 2014. Consistent with that guidance, when I look at the first quarter in terms of incremental spend on those issues, we had about $6 million. So I think it's consistent with the guidance that I provided for the year.

So Konrad, it's Rice. Great question on the headcount, up 5.4% versus sales around 4%, why would you do that? Keep in mind, we don't break out, and I'm going to throw some terms at you here that you'll chuckle about, but we don't break out same-store headcount, if you will. What's buried in that 5.4%, the acquisition of Shiel and the headcount that came over. If we buy clinics, things of that nature, so some this is acquisition-related and we really don't look at it, again, from kind of a same-store view. I guess, that's something we could think about doing. But I would say this, just to give you a sense of us and our seriousness about headcount, back in February, we put a hiring freeze on. Now what does that mean? It means that we looked at the budgeted headcount for incremental people to come into the company, and we froze that and now for incremental new hires to come into the company, it has to come all the way up to a Board member to be approved. Now that may seem overly drastic to you, but that's the only way through my, whatever 30-some years I've been doing this, to know that you can make sure you can control headcount when you're a global operation like we are. And then if somebody is in the company and they leave and they are a replacement that has to get vetted at a very senior-level just like a level below the management board. But keep in mind on the service side of the business, both in the states within the U.S., individual states, and numbers of countries internationally, we are required by law to maintain certain ratios of nurses to patients or technicians to patients, so we don't always have total flexibility in how we manage that. The product side of the business probably lends itself to a little more control in that regard and then from the administration side of the business. But when it comes to caring for patients, and not that we'd ever want to put anybody at risk anyway, that's a fairly well-known and directed location-by-location set of ratios that we have to maintain, Konrad.

And our last question for today is a follow-up question from the line of Michael Jungling of Morgan Stanley.

Only 2 more questions. When I look at your International EBIT and I adjust for currency, it seems to be quite flat. Can you sort of explain the outlook for the remainder of the year, whether the International EBIT should grow? Maybe my analysis is wrong, but your EBIT is sort of down 2.2% in the first quarter. You had a bit of currency effect, it seems that sort of flattish, so the outlook for International for the year would be useful. And then the second question I have is just going to corporate EBIT. You had minus 71 this quarter, so that's up 11. Can you just provide a reconciliation of the ins and outs of what happened in the quarter and what that number should look like for the full year? That's corporate EBIT, please?

Yes. Just give us a minute, Michael, because we're on a level of granularity we usually don't go to. And so I'm looking at a couple of things.

So Michael, we've gone to the 3-ring binder, give us a minute. We just got to look some stuff up.

Yes. On the corporate spending, Michael, I would say, some of the things we've talked about I commented on a relatively small effect in Q1 relative to the management board. I commented on incremental spending associated with some of the quality and compliance initiatives we're undertaking. A pretty good piece of that would show up in the corporate spend. So I think year-over-year, you will see an increase in corporate. So obviously, consider that in our overall guidance, but you will see a good portion of the $30 million that I alluded to following in corporate, not all of it, but most of it. So you're probably looking at corporate being up, let's say, $20 million to $30 million year-over-year, if that's helpful. And on the International EBIT, just bear with us a second here. No, we are seeing -- despite the currency effects, we're seeing an improvement in International EBITDA over the course of the year. So I think it's reasonable to expect that business to grow. Yes, the product should recover as Rice indicated earlier. And just in terms of FX, for sure, you do have year-over-year effects, but when we guide, we guide at current rates, and as we look at some of the exchange rates in the International market relative to our guidance, we're actually not seeing big changes in terms of spot rates today versus the rates that were in effect when we guided for '14. So I think even though the explanations year-over-year will always include exchange rates, I think relative to our guidance in dollars for the year, we're anticipating to see increases in the International business.

So Michael, the flatness in international EBIT is more a function of weak products business in Q1, not much else?

Yes, I think that's fair.

Okay, gentleman, seems that was the last question today from the phone lines.

Great. Thank you so much, Patrick. Thank you so much everybody for participating. Much appreciated. We're going to talk to you next in Q2 end of July.

Take care, folks.

Thank you very much.

Thank you. Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.